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Tradeoff between Equity and Effciency in Revenue Sharing Contracts

  • Bogumił Kamiński

    ()

    (Warsaw School of Economics)

  • Maciej Łatek

    ()

    (George Mason University)

We investigate the problem of setting revenue sharing rules in a team production environment with a principal and two agents. We assume that the project output is binary and that the principal can observe the level of agents' actual effort, but does not know the production function. Identifying conditions that ensure the eficiency of the revenue sharing rule, we show that the rule of equal percentage markups can lead to inflation of project costs. This result provides an explanation for project cost overruns other than untruthful cost reporting.

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Article provided by CEJEME in its journal Central European Journal of Economic Modelling and Econometrics.

Volume (Year): 2 (2010)
Issue (Month): 1 (January)
Pages: 1-16

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Handle: RePEc:psc:journl:v:1:y:2010:i:4:p:1-16
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  1. Susan Gensemer & Kiridaran Kanagaretnam, 2004. "Alliances and cost declaration," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 121-136.
  2. Hajime Kobayashi & Katsunori Ohta & Tadashi Sekiguchi, 2008. "Optimal Sharing Rules in Repeated Partnerships," KIER Working Papers 650, Kyoto University, Institute of Economic Research.
  3. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
  4. Courtney Dennis & Marschak Thomas, 2006. "Shirking and Squandering in Sharing Games," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-34, December.
  5. Roland Strausz, . "Moral Hazard in Sequential Teams," Papers 001, Departmental Working Papers.
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